By: Andrea Cohen
This time we would like to talk about the merits of two opposing trades: long and short USD-JPY. The rationale is to highlight the reasons in favor of each move and by doing so clarifying the risks of the opposite move.
As everyone who is active in the markets in general and Forex in particular knows, Japan is the center of attention for traders in the last 6 months. The new government there had been vocal (admittedly even before it was elected) about the need to devalue the Yen and to be more proactive in stimulating the economy. Now that Abe is in power and the new Bank of Japan President, Kuroda, took office, policy makers go beyond rhetoric and start taking action.
If until now what drove the JPY was statements and declarations of intentions, then now BoJ is going to be aggressively active in the market and practically double its monetary basis. The plan to inject more money into the market through bond purchasing is intended to be a long one (a year). Over the weekend, the G-20 OKed the move by the BoJ. Why is that an important detail? Because this artificial devaluation is in a sense contradictory to the stance of G-20. Therefore, this green-light is significant to us because it means there will (probably) be no opposition to this bond purchase. It’s not that Japan is the first major economy to implement QE lately (the United Stake and the UK to name just two), but the worries were due to the fact that the Japanese QE comes after the USD-JPY is already up 20% in the last 6 months anyway.
With this, it seems like there is nothing the stop the devaluation of the JPY further and that the USD-JPY is going to go up.
Well, why hasn’t it? Looking at the screens on Monday, one could think it was a Bank Holiday. The USD-JPY didn’t crush the 100 barrier as could have been expected.
We believe that the answer lies with positioning in the market of Japanese investors. After two years of largely loading up on foreign (mainly USD but also AUD and EUR) bonds, the large Japanese institutional investors are back in the market, but this time in the other direction. The high USD-JPY is perceived by many of them as an opportunity to sell foreign assets. This sell-off of say, USD bonds mean that the investors are then selling these Dollars, putting downward pressure on the USD-JPY.
In fact, this trend is so powerful that we see players putting on bearish USD-JPY bets based on it.
So on one hand, the macro-economic activity is a sign to be bullish the USD-JPY. Yet, on the other hand, indicators of activity in the markets signal that being bearish (at least in the shorter term) could be the smarter move. Whatever you decide to do in USD-JPY be alert to news releases and numbers published as they can reverse either trend quickly.